Private firms are encouraging changes in states' power distribution reforms

Firms and tech experts are queueing up to offer innovative models of managing the power supply chain

Power reforms are showing some flickers of progress in urban and semi-rural India with several states tying up with private players to overhaul the infrastructure and operations on the distribution side of the business.

This move to upgrade the states’ power distribution business has generated robust opportunities for public and private firms in consultancy, distribution franchisee, operations & management, etc.

From large companies such as Tata Power, Torrent Power, Feedback Energy Distribution Company (FEDCO), Essel Infra, and Deloitte to technical experts such as Medhaj Techno, Kalash Energy and SGS India, firms are queueing up to offer innovative models of managing the power supply value chain.

This current of reform flows from the ambitious Ujwal DISCOM Assurance Yojana (UDAY), a financial restructuring programme that the government proposed for debt-laden state-owned distribution companies (discoms) in 2015 and for which 26 of India’s 29 states have signed on. Implicit in the programme, which sought to convert some Rs 4 lakh crore of bank debt into bonds, simultaneously committing states to cut discom losses and improve operations.

With further loss-financing ruled out for UDAY states, many of them also rejected privatising networks, one obvious way of achieving this, because of the controversies and labour unrest that invariably attend such exercises. Instead, some discoms have employed partnership routes with encouraging results.

The most common of them is the Management Operator Model (MOM) under which the private partner takes care of the operational turnaround and is paid in proportion to the amount of savings or the increased revenue. Odisha, which had unsuccessfully experimented with privatisation with Reliance Power, achieved some success with this model with FEDCO as the private partner.

Last month, FEDCO reported an average reduction in commercial and technical losses (known as AT&C losses) of 23 per cent in the four years that it has been operating in five electricity divisions in the state. For a discom that operates in an area of which 90 per cent is a small town in nature bordering on rural, the company claims that this is the steepest reduction in AT&C losses in India.

FEDCO, which started operations in 2013, doubled consumer collection to Rs 400 crore a year and increased energy supply by 22 per cent. Against a power purchase cost of Rs 45 crore, the revenue from bill collection is Rs 99 crore, according to Devesh Chaturvedi, FEDCO managing director. “Odisha is now looking to award six more circles to private companies,” he added. The experience in the state has proven a good stepping stone, too: “FEDCO’s successes in Odisha led us to Madhya Pradesh where we have partnered with the state for five divisions, namely Shivpuri, Katni, Dewas, Indore rural and Jabalpur rural.”

Through its parent company, Feedback Infra, Chaturvedi said the group has consulted many states under UDAY. Why did the MOM model work where the franchisee model, that some states and cities adopted to overhaul distribution networks, has proved less successful despite the availability of funds and technical expertise?   “What has always been missing in reforming power distribution is accountability. A private partner ensures that ” he explains.

Other states that have taken up the MOM model are Rajasthan, Uttarakhand, Maharashtra and Madhya Pradesh (MP). Private companies involved here are assisting the states to bring in IT measures for monitoring power supply, adopting energy efficient solutions, overhauling the supply infrastructure through underground cabling and smart meters and so on. In Ajmer for instance, Tata Power is the franchise that is now operating the whole power distribution network in the city.

Jharkhand, some circles in MP and Himachal Pradesh are opting for consultancy contracts to improve their services. This entails tying up with a private discom or consultancy firms to draft plan for their reforms. Tata Power has now received similar interest from Jammu & Kashmir, servicing consumers in 80 towns in J&K, including Ladakh district.

Some states that have the political capital to push for limited privatisation have also shown some success. Bhiwani, Agra, Ahmedabad, for instance, have shown turnaround and have profitable power distribution businesses. It failed, however, in Kanpur, where local politics saw the exit of the private distribution franchise, Torrent Power.

Regulatory improvements are expected to strengthen the confidence of private players, and many are pinning their hopes on proposed amendments to the Electricity Act, 2014. The principal one is segregating carriage and content, under which discom will bring electricity to a consumer’s door but will leave the last-mile supply and revenue recovery to private companies.

For segregating carriage and content the Forum of Regulators (FOR) has come out with the action plan dividing the states into four blocks that would phase in this reform — for instance, phase I would be three to five years and so on, explains Praveer Sinha, managing director of Tata Power Delhi Distribution Limited (TPDDL), one of first entrants into privatised distribution in Delhi and which offers consultancy to several states.

“Since the government has laid emphasis on IT implementation, this plan should be executed soon because the discoms are ready for the separation of carriage and content. Delhi, Gujarat, Punjab, Karnataka are likely to be included in Phase I,” Sinha added. 
 

As yet, however, urban electrification remains but a glimmer of its full potential. One indication: The government has allocated Rs 25,913 crore for the Integrated Power Development Scheme (IPDS), a grant aimed at urban power reform, the highest-ever sanctioned amount for this scheme. Of this, however, only Rs 3,385 crore has been disbursed to states. 

Since IPDS funds are linked to state’s power reform plans, this amount indicates that there are miles to go in transforming urban electrification. Executives in some of the franchisees point out that payment and subsidies remain sticking points that states have to tackle carefully given the fact that power pricing has long been a political issue.

“States like Bihar have shown political courage by raising tariffs and linking subsidies directly to those who genuinely need it. Thus, the state has avoided any conflict by hiring private consultants for advisory and strengthened its own state machinery for on ground improvement,” said a senior executive of one leading power consultancy. 

The demonstration effect of private partnership models like MOM could well provide the spark for change.