Despite decades of power reforms, discoms still an area of darkness

A remarkable study on the state of electricity distribution companies (discoms) of India shows that instead of improving, the revenues these companies receive from their consumers has declined in a 12-year time frame. As more political parties ratchet up promises to make electricity free in an election-heavy year, this finding has huge implications for government finances. 

The study, jointly written by Prabhat Barnwal of Michigan State University and Nicholas Ryan of Yale University, also seems counter-intuitive, since one of the conclusions from the two-decade long power reforms is that the overall dues of these discoms have come down. “The Government of India has made several interventions to improve financial and operational efficiencies of discoms”, noted a Parliament reply from the Ministry of Power, in March 2023. 

Both are, however, correct and reflect the complex nature of the problems for the electricity sector. Even as the government has largely succeeded in ensuring electricity for all and the average supply in rural areas has increased from 12.5 hours per day in FY15 to 21 hours in FY22, the paper notes that what the discoms receive from their bill-paying consumers has decreased from 75 per cent of total revenues in FY10 to 71 per cent in FY22. 

The emphasis for these discoms is to only ensure power supply reaches to the farthest corner of their grid. Quoting Power Finance Corporation data, Barnwal notes “There is little incentive for loss reduction by the discoms” (<see interview>). The bills are not only kept low for the consumers as more states offer free or subsidised power for lower income groups, those too are not collected. The difference is often made good by raising the price of electricity for the industrial sector. The environment does not make for a sense of financial discipline.

He explains it as an “agency problem” as understood in public policy discourse. These companies, mostly government owned, have come to depend heavily on subsidies. There are 71 discoms, according to power ministry data, in the country.  

To illustrate their study, Barnwal and Ryan, in their paper “Is Electrification in India Fiscally Sustainable?”, which they discussed at the India Policy Forum, 2023, organised by NCAER drew upon the example of Rajasthan. The state showed at least two of its three discoms recorded profit in FY22 of Rs. 994 crore. But these profits were made possible because of state subsidies and grants from the central government-run Ujjwal Discom Assurance Yojana or UDAY. The preliminary draft of the paper notes that in FY18, the operational revenue or the actual revenue collected by the three state discoms were only 62 per cent of their total receipts. 

The challenge of stagnant or even worsening operating expenses of the discoms is a new anxiety distinct from their problem of high transmission and distribution (T&D) losses. Writing in <i> Business Standard, <p> Power Secretary Alok Kumar noted, “The financial performance of discoms had been under pressure with high Aggregate Technical and Commercial (AT&C) losses and burgeoning debt burden”.

With such a low level of realisation from the actual consumers, the discoms are in a bind. They are expected to finance their investments and also cover their working capital and operating losses. This is where money from the state government or the Centre becomes their lifeline. UDAY and its predecessor central assistance have not changed this miasma of financial indiscipline at the discoms, they argue. UDAY, has however, made transparent how much subsidy is being provided from the state and central budgets. It is unclear whether the Centre’s Rs. 3 trillion Revamped Distribution Sector Scheme, the latest in the line of bail-out packages covering FY22 to FY26, will significantly change the state of discoms’ finances. 

For instance, commenting on a Rs. 500 crore bond issue of Jaipur Vidyut Vitran Nigam Limited (JVVNL) in January 2022, rating agency Icra laid out the challenge. “The assessment takes into consideration the presence of the cost-plus tariff framework through the fuel surcharge mechanism, which allows JVVNL to recover the uncontrollable cost variation on a quarterly basis”.

This means the company is permitted by the regulator to account for the high AT&C losses by a compensatory high tariff for the electricity it supplies to other sectors, instead of being judged on the economics of the costs. And when even this failed, Icra noted “the rating for JVVNL also factors in the company’s status as a wholly-owned power sector entity of the government of Rajasthan and the support from (the state) in the form of equity, grant and guaranteed debt”. The bond issue was subsequently withdrawn. 

What are the options from here to align the incentives of the discoms with fiscal prudence? There are two of those. The first is to permit open access. The second is smart metering. 

Open access means instead of one discom in a geographic circle, there is competition. This allows every consumer to decide from which discoms to buy the power. It immediately makes every consumer valuable for the discoms, as it happens in the telecom business. The catch is that to make it happen, the electricity meters may need to be smart to draw the power at any time of the day from the one offering the lowest cost. 

The larger problem has been created by the respective electricity regulation of the states. Many states don’t allow open access to protect the discom business and some, which do set high walled-in gardens, from where only few consumers like industry can jump out. An intermediate option recently begun is to allow time of day metering, under which consumers get lower bills for running their power bills at non-peak hours. 

Barnwall and Ryan have not considered these possibilities since their analysis ends in FY22. They have, however, supported the India government policy to introduce smart meters across the country. Data from the power ministry shows, till the end of June 2023, less than 3 per cent of the total consumers have a smart meter. Of course the pace has begun to rise. In some of the states with high losses like Bihar, Assam and Haryana, the installation of meters is far higher than the national average. 

“The implementation of various reform measures, including smart metering, fuel & power purchase adjustment surcharge (FPPAS) rules, and timely recovery of Government dues remain important for improving the finances of state discoms,” said Vikram V, vice-president & sector head - corporate ratings, Icra. 

But as the paper shows, the critical challenge will still remain on how discoms read the political signals to push for higher revenue realisation, even when the rates are abysmally low.