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17-January-2025-Editorial

January 17 @ 7:00 am - 11:30 pm

PRIVATISATION OF POWER DISTRIBUTION COMPANIES (DISCOMS)

In December 2024, the Supreme Court supported the government’s decision to privatize power DISCOMs in Chandigarh, marking a significant step towards reforming India’s power distribution sector. This decision has reignited debates about the benefits and challenges of privatization in ensuring efficient and sustainable electricity distribution.

Why is there a Need for Privatisation of Power DISCOMs?

High AT&C Losses:

  • Aggregate Technical and Commercial (AT&C) losses in India remain high at 17.6% in FY24.
  • These losses result from electricity theft and unbilled supply, weakening the financial health of DISCOMs and limiting investments.

Operational Inefficiencies:

  • Billing efficiency is only 87%, and collection efficiency stands at 97.3%, reflecting systemic gaps in operations.
  • Such inefficiencies reduce revenue and add financial strain on DISCOMs.

Financial Deficit:

  • The gap between the Average Cost of Supply (ACS) and Average Realisable Revenue (ARR) widened from 33 paise per unit in FY22 to 55 paise per unit in FY23.
  • This disparity increases debt and dependence on state subsidies.

Subsidy Dependence:

  • The financial deficit in the power sector grew to Rs. 79,000 crore in FY23 from Rs. 44,000 crore in FY22.
  • This unsustainable reliance on subsidies reflects poor fiscal management.

Rising Power Demand and Costs:

  • An 8% rise in power demand in FY23, coupled with reliance on expensive coal imports, pushed the average power purchase cost up by 71 paise per kWh.
  • Without reforms, these costs could further destabilize public-sector DISCOMs.

Proven Success of Private Models:

  • In Delhi, privatization reduced AT&C losses from over 50% in 2002 to single digits.
  • Annual savings of Rs. 1,200 crore were achieved, showcasing the potential of professional management.

Limited Impact of Public-Sector Reforms:

  • Initiatives like the Ujwal DISCOM Assurance Yojana (UDAY) have had limited success in addressing losses or improving operational efficiency.
  • Private participation is needed to introduce accountability and modern technologies.

Challenges of Privatisation of DISCOMs

Employee Opposition:

  • Workers fear job losses, unfavorable service conditions, and retrenchment.
  • Experiences such as Delhi’s voluntary retirement schemes highlight these concerns.

Legal and Regulatory Hurdles:

  • Privatization must comply with the Electricity Act, 2003, which often delays processes.
  • In Chandigarh, legal disputes questioned the eligibility of private bidders, causing delays.

Consumer Tariff Concerns:

  • Tariffs may increase post-privatization to recover costs, leading to potential consumer backlash.
  • Balancing affordability and cost recovery poses a challenge for regulators.

Lack of Transitional Support:

  • Odisha’s failed privatization in the 1990s stemmed from inadequate financial and operational support.
  • In contrast, Delhi’s success was aided by transitional funds of Rs. 3,450 crore.

Government Steps to Support State DISCOMs

Schemes:

Ujwal DISCOM Assurance Yojana (UDAY):

  • Launched in 2015 to alleviate financial stress.
  • Allowed states to take over 75% of liabilities through low-interest bonds.
  • Promoted measures like theft reduction and smart metering.

Revamped Distribution Sector Scheme (RDSS):

  • Budget: Rs. 3,03,758 crore (FY 2021-22 to FY 2025-26).
  • Aims to reduce AT&C losses to 12-15% and eliminate the ACS-ARR gap by 2024-25.

Integrated Power Development Scheme (IPDS):

  • Focused on strengthening urban power infrastructure and improving reliability.

Other Measures:

Integrated Ratings:

  • Annual evaluations of DISCOMs’ operational and financial performance encourage accountability.

Financial Support:

  • In FY23, state governments provided 108% of booked subsidies to sustain DISCOM operations.
  • Transitional funding (e.g., Delhi) helped manage initial hurdles post-privatization.

Regulatory Reforms:

  • Late Payment Surcharge Rules reduced payment delays, easing liquidity pressures.

Privatisation in Union Territories (UTs):

  • Success stories include Dadra and Nagar Haveli and Daman and Diu (2022).
  • Progress in Chandigarh and Puducherry highlights ongoing efforts.

Way Forward

  • Engaging Stakeholders: Involve employees, consumers, and political groups to address concerns and build consensus. Clear communication about safeguards, such as pension sharing, can reduce resistance.
  • Strengthening Regulations: Empower State Electricity Regulatory Commissions to ensure fair tariffs and efficient operations.
  • Phased Tariff Rationalisation: Gradually adjust tariffs while offering subsidies to vulnerable consumers to balance affordability.
  • Modernizing Infrastructure: Prioritize smart grids, metering, and technology adoption to improve efficiency.
  • Encouraging Competition: Introduce retail competition in phases, giving consumers a choice and enhancing service quality.
  • Learning from Past Experiences: Use best practices from successful models like Delhi and avoid mistakes made in Odisha’s failed privatization.

Conclusion

Privatization of DISCOMs offers a path to operational efficiency, financial stability, and better service delivery. However, it requires careful planning, stakeholder collaboration, and robust regulatory frameworks to address challenges and ensure a smooth transition. With rising power demand and evolving energy needs, privatization can play a pivotal role in transforming India’s power distribution sector.

Details

Date:
January 17
Time:
7:00 am - 11:30 pm
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