A reform scheme for the ailing Indian State Distribution Sector

Background – The environment in which Distribution exists ?

The electricity sector is a strong pillar of any country’s economy. The role of the electricity sector becomes critical for a country like India which is eyeing to become a $5 trillion economy by FY 2025. The main elements of this sector are GTD – generation, transmission and distribution.

The financial health of the power sector value chain is determined by the financial strength of the distribution link as it is the interface connecting power sector entities with electricity end-users i.e., consumers. Distribution companies (DISCOMs) raise the invoice to consumers for energy usage and the money received is then used for paying back to the transmission entities and generators. As the distribution segment directly deals with consumers who are also potential vote banks for political parties, they are susceptible to political influence. This susceptibility is also a cause of ill situation of this sector.

The unfortunate situation is that distribution link in India is heavily debt-laden and is grappling with financial woes. DISCOMs dues to Gencos have already crossed INR 1 trillion mark as of May 2022.[1]

DISCOMs are trying to survive in a non-supporting environment

It won’t be apt to make DISCOMs responsible for all their ill condition. There can be multiple reasons behind it such as –

• State government promises subsidies to DISCOMs to compensate the losses incurred in supplying electricity to low-end consumer categories such as agricultural and residential. But these are not reimbursed to DISCOMs on a timely basis.
• State government departments do not pay their bills on time.
• Due to a gap in technological intervention, electricity consumed or supplied by DISCOMs is not aptly billed resulting in a significant commercial loss.

A study report titled “Unpacking India’s Electricity Subsidies: Reporting, transparency, and efficacy” by IISD and CEEW captures the worsening situation of DISCOMs as follows[2] –

• Sales revenue of DISCOMs as a share of total expenditure has fallen 3% from FY 2016 to FY 2019 even though the UDAY scheme intended to increase revenue recovery.
• The cost of supply is getting increased. 19 of 31 states and UTs have a higher cost of supply than in FY 2016.
• UDAY scheme also intended to reduce aggregate technical and commercial (AT&C) losses to 15% by 2019. But 25 out of 31 states and UTs have not reduced losses in line with targets owing to poor billing efficiency of DISCOMs.
• Nationally, agricultural consumers were allotted 75% of total subsidies, followed by domestic consumers at 20% and industries at 4%. It can be seen that the consumer category providing less revenue and causing the high losses is getting the highest share of subsidies. Even subsidy reporting is being not done. Only 13 states and UTs with subsidies clearly report subsidy data, with only seven reporting subsidies by category basis.

The government is continuously trying to aid DISCOMs

The governments are also trying to push for reforms in the distribution segment[3]. A few of the recent initiatives are UDAY, DDUGJY and IPDS but the success rate has remained meagre only.

It can be seen that even after coming up with multiple initiatives and fund infusion provisions, DISCOMs remain in the same ill-financial situation. For instance, CAG has captured the post-UDAY scenario of TANGEDCO (Tamil Nadu DISCOM). There was a failure in converting TANGEDCO’s debt into lower interest-carrying Government guarantee bonds resulting in an interest burden of ~INR 10,000 cr during 2017-20. Even ACS-ARR gap increased from 60 paise/unit in 2015-16 to 107 paise/unit in 2019-20 because of tariff non-revision. It seems the UDAY scheme only provided temporary relief to TANGEDCO by transferring TANGEDCO’s debt of INR 22,815 cr to the Government of Tamil Nadu.[4] Hence, a need for a reform-based scheme was felt after UDAY.

Need for a reforms-based scheme

It seems the central government has realized the criticality of the reforms-based scheme now after the non-satisfactory result of earlier schemes. In my view, the government has clarity that the following five elements need to be incorporated into any distribution-based scheme. These are –

1. State’s active involvement: As electricity lies in the concurrent list, it comes under the purview of the centre and state government. Hence, any improvement in this sector needs to be brought in by their active involvement. In fact, other entities of concern also need to be involved such as power regulators (regulatory commissions), government departments, etc.
2. State-wise tailor-made approach: Owing to the varied geography, consumer mix, energy pattern and differences in loss level and IT adoption, adoption of “one-size-fits-all” model cannot be done. Hence, a state-specific action plan is to be considered.
3. Self-improvement: A better way of improvement is self-improvement. It ensures leeway to select its own scale of comparison and then also allows it to become a better version of itself. It is like selecting own KPIs by employees in a company.
4. Carrot and stick approach: In other words, there is a need for result-linked incentive-based scheme. The monetary rewards can be given to good performers and poor performers can be penalized by not providing financial aid.
5. In-depth monitoring of performance: There is a need for stringent evaluation of performance while deciding on the monetary awards leaving no ambiguity for assessor and assesse.

Considering the above five elements, it seems has government has come up with “Revamped Distribution Sector Scheme (RDSS)” which is a reforms-based and results-linked scheme, and which also capture above five elements in it.

Let’s see how.

1. State’s active involvement: This scheme involves formulation of action plan by state DISCOMs for strengthening its Distribution system and improving its performance by way of various reform measures, which would result in improvement in their operational efficiency and financial viability as well as improve the quality and reliability of power supply to the consumers. It will contain an analysis of the root cause of losses along with steps to be taken for reduction of loss and ACS-ARR gap and work plan. This is to be submitted to the Nodal Agency on the recommendation of Distribution Reforms Committee (DRC) and with the approval of the State Cabinet. Hence, with the involvement of state cabinet and DRC, state government and officials automatically gets involved.
2. State-wise tailor-made approach: Each DISCOM has to submit their own action plan comprising of their own targets according to their current status. Hence, it provides state-specific provisions to be added to action plan as per the need of state.
3. Self-improvement: Financial assistance under the scheme is tied to meeting the pre-qualification requirements as well as performance levels on the agreed key performance indicators (KPIs) for each year. DISCOMs can contextualise their action plans/DPRs and accordingly their results evaluation frameworks. It is like setting a goal for every year on their own and then trying to achieve it during the course of year and hence a way to self-improve.
4. Carrot and stick approach: The scheme allow for their own goal setting which would become the cornerstone for evaluation of their performance for release of budgetary support under the scheme. Stick would act as a compliance of pre-set KPIs whereas carrot will be the budgetary support to be provided by government.
5. In-depth monitoring of performance: There is a detailed “Results Evaluation Framework” in the scheme. Further, it would have two components - (i) pre-qualifying criteria and (ii) Evaluation Matrix. Also, pre-qualifying criteria must be mandatorily met by the DISCOM before it is evaluated based on Evaluation Matrix. Hence, it involves a multi-layer monitoring involving multiple aspects on financial sustainability, operational aspect, infrastructure works and policy & structural reforms.?

Current status of RDSS scheme ?

As on Apr 2022, a total of INR 1.62 lakh cr of proposals from 13 states have been approved. The top states are UP, Tamil Nadu and Rajasthan.[5] As on July 2022, 38 DISCOMs have met the qualification criteria and have received funding approval.[6]

Way ahead

The centre has come up with a revolutionary scheme having the potential to revamp the laggard distribution sector. The arrival of this scheme becomes critical especially amidst the various energy disruptions which are happening on energy landscape. Energy transition is also being favoured by nation focusing on net zero ambition. Even rapid deployment of IT technology is making the traditional means to conduct and operate business a useless means now. Hence, it becomes critical for the distribution segment to become financially viable to be able to manage such disruptions.

The power sector future looks bright in India but the proper implementation and adoption of this scheme by state DISCOMs and governments would play a decisive role. India being a federal structure works well with the joint effort of state and centre government. Hence, the presence of a smooth and cooperative federalism between state and centre would be essential. Probably, the next step in the cooperative federalism should be adopted – the step of competitive cooperative federalism. It means all states need to have a healthy competition to improve their distribution segment and also try to learn from the best practices. ?

Only the time will tell whether this scheme would remain just a paperwork or it will really bring the reform in the distribution segment. We, as a consumer, are keen to know the answer.

PS - The views expressed above are personal and based on secondary research. ?

References -

[1] https://www.business-standard.com/article/economy-policy/discoms-dues-to-gencos-touch-record-rs-1-trillion-122052200727_1.html

[2] https://www.iisd.org/system/files/2020-12/india-electricity-subsidies.pdf

[3] https://powerline.net.in/2021/07/06/fiscal-impetus/

[4] https://cag.gov.in/en/audit-report/details/116197

[5] Govt approves Rs 1.62 lakh cr proposals from 13 states - The Economic Times (indiatimes.com)

[6] https://www.business-standard.com/article/economy-policy/38-discoms-qualify-for-rs-1-9-trn-funding-under-new-reforms-officials-122071000390_1.html#:~:text=RDSS%20was%20announced%20in%20the,targets%20stipulated%20in%20their%20DPRs.?