Navigating the Complex Landscape of India's Power Distribution: Public vs. Private

India's electricity distribution sector has long been mired in challenges such as inadequate infrastructure, high losses, and inconsistent service quality. As the nation strives for energy security and equitable access, the debate between public versus private ownership has intensified.

On 30 August 2024, the Centre for Energy, Environment, and People (CEEP) hosted a webinar titled "Public or Private: The Role of Ownership in Navigating India's Power Distribution Woes." This event marked the launch of CEEP's reflection paper, "Is Privatisation a Panacea for India's Electricity Distribution Sector?”, which critically examines the arguments for expanding private sector involvement in electricity distribution as advocated by the Center for Strategic and International Studies (CSIS). Read the paper here.?

Experts from the webinar, including Abhishek Ranjan (EY Parthenon), Ashwini Chitnis (Centre for Social and Economic Progress), M G Suresh Kumar (Kerala State Electricity Board), Raj Pratap Singh (former IAS), and Shantanu Dixit (Prayas Energy Group) provided valuable insights on ownership models and reforms. This blogpost explores their perspectives on the complex ownership landscape in India's power distribution sector.

Examining the CSIS Report: A Call for Privatisation

The CSIS report argues that private companies can boost efficiency, reduce losses, and attract investments better than public entities, and even suggests privatisation could benefit political incumbents by enhancing re-election prospects. However, CEEP's researchers critiqued the report for methodological flaws and biases, disputing the notion that privatisation always leads to better efficiency and political outcomes. They highlighted failures of private companies like Applied Energy Services Corporation (AES Corp.) and Bombay Suburban Electric Supply (BSES) in Odisha due to operational and financial challenges. The report selectively focuses on urban private discom successes while overlooking similar improvements in the public sector and the challenges faced by public discoms in underserved rural areas.

The Need for Technological Capability and Strategic Governance

Ashwini Chitnis identified the need for greater technological capability and strategic planning in the energy sector, especially amid the ongoing energy transition. The evolving energy landscape requires agility from distribution companies (DISCOMs), which the sector has historically lacked. Chitnis stressed that addressing these challenges depends on the governance and regulatory dynamics among DISCOMs, state governments, and regulators, which can either support or obstruct the sector’s ability to meet new challenges.

Dr. Suresh Kumar cited Kerala State Electricity Board's (KSEB) model, which demonstrates that public utilities, when managed inclusively and aligned with community needs, can achieve technological advancements and efficiency without privatisation. He highlighted KSEB’s success as a vertically integrated public utility that resisted unbundling and maintained high service standards through strategic governance and community involvement. This counters the argument that private ownership is necessary to drive sectoral improvements.

Structural Reform and the Monopoly Question

Raj Pratap Singh strongly argued that the public versus private ownership debate is misplaced, as it merely substitutes one form of monopoly with another. Given the natural monopoly status of electricity distribution, Singh advocated for comprehensive reform and unbundling of the distribution sector to promote competition and efficiency. This structural change is essential to dismantling monopolies and fostering a competitive environment aligned with India’s socio-economic context.

Dr. Kumar highlighted that private companies prioritise profit, while public utilities focus on social goals such as equitable access and affordability. Given India’s low per capita electricity consumption and the need for a green energy transition, he stressed the need for government intervention and a socially controlled approach to ensure the electricity sector meets the needs of all consumers. He advocated for equitable network modernisation across both urban and rural areas, especially in underserved communities.

Governance and Accountability as Efficiency Enablers

Governance deficits and lack of accountability are significant barriers to the efficient operation of public sector DISCOMs, as highlighted by Shantanu Dixit. He noted that these issues not only impact consumer satisfaction but also place a financial burden on state governments, which are often required to fund the losses of these companies. To mitigate these challenges, Dixit advocated for a comprehensive approach that includes improved governance, regulatory frameworks, and the incorporation of technological advancements.

Dixit also pointed out that while competition has the potential to enhance efficiency, the natural monopoly of distribution networks limits the extent to which competition can be effectively implemented. This necessitates creative approaches to foster competition without entirely relying on privatisation or maintaining public monopolies.

Importance of Regulatory Oversight?

The panelists also discussed the critical role of regulatory bodies in ensuring accountability and performance evaluation. Chitnis noted that franchises, often perceived as a politically easier alternative to outright privatisation, suffer from a lack of rigorous performance evaluation by regulators. She emphasised the need for independent, transparent assessments of franchise performance to provide a more accurate picture of their impact.

Raj Pratap Singh added that the prevalent push for cost-reflective tariffs, which allows distribution companies to pass inefficiencies onto consumers, undermines regulatory accountability. Singh argued for a structured, normative framework that holds distribution companies accountable for improving efficiency rather than shifting costs directly to consumers.

Experts highlighted Odisha’s privatisation challenges, where private licensees initially failed, leading to a model resembling franchising to balance privatisation with consumer protection. Concerns about fair distribution of efficiency gains persist, and private sector interest remains low despite incentives, particularly in diverse, rural, low-income areas without strong government support.

Operational Freedom and Challenges for Private Utilities?

Abhishek Ranjan highlighted the advantages and challenges faced by private utilities in India's electricity distribution sector, particularly focusing on the strategic flexibility and operational freedom they possess compared to state-run counterparts.?

Private utilities, like in Delhi’s joint venture model (49% government, 51% private), have management freedom that allows them to make strategic decisions on operations, tariffs, and customer service. This operational leeway enables them to invest in infrastructure, reduce losses, and improve customer experiences with innovations like easier bill payments and advanced technologies.?

Private discoms succeed partly due to their ability to make quick, bold decisions, unlike the cautious processes of state-run utilities. However, government oversight and limited access to public sector incentives hinder further modernisation and investments in advanced distribution technologies. To maintain efficiency and prevent higher retail tariffs, support through viability gap funding and incentives is needed to sustain the benefits of privatisation.

A Balanced Path Forward

Simran Grover, CEO of CEEP, stressed the need for proper funding and resource allocation for public utilities in the energy sector. While private companies drive innovation through equity investments on the consumer side, public institutions also require sufficient funding to adopt these innovations. Using Rajasthan as an example, he noted that distribution companies face systemic resource constraints, such as withheld equity and delayed payments and subsidies. Grover emphasised addressing these challenges before blaming public utilities for operational failures.

The expert panel at the CEEP webinar highlighted that resolving issues in India’s electricity distribution sector requires more than choosing between public and private models. It necessitates addressing deeper structural, governance, and regulatory challenges. While private sector participation can bring efficiencies and technological advancements, effective and inclusive governance of public utilities can also achieve high service standards and equitable access.?

A balanced approach involves harnessing the strengths of both public and private sectors, enhancing competition, strengthening regulatory framework, and ensuring accountability. By restructuring the sector to encourage fair competition and efficient service delivery, India can achieve a future of reliable and affordable electricity for all.