At the recent discussion forum organised by the Bengal Chamber of Commerce and Industry (BCCI) titled “West Bengal – Towards Sustainable Growth: Perspectives on Energy Policy and Environmental Realities – A Balanced Approach”, one of the important issues deliberated was the current state of India’s power distribution sector, problems it faces and the potential solutions to those problems.

India’s power distribution sector is characterised by huge losses
Despite abysmally low per capita power consumption, India experiences up to 80% electricity shortfall in certain regions at peak consumption periods. It has been widely acknowledged that a heavily loss making and unsustainable distribution sector is at the core of such a sorry state of things. Mr. Partha Bhattacharyya, Senior VP, BCCI, cited that the combined distribution loss faced by the country currently exceeds INR 1 trillion (USD20 billion). For the Indian power industry to experience sustainable growth, the distribution sector has to therefore, be first made financially sustainable.

Losses stem from failure of the Electricity Act to ensure sustainability
So where do the problems plaguing the distribution sector stem from? According to Mr. M.K. De, Principal Secretary, Department of Power and Non-Conventional Energy Sources, Government of West Bengal, although the Electricity Act, 2003, provided a broad framework, it fuelled certain contradictions which in effect led to its failure in addressing the issue of sustainability of the distribution sector.

Distribution companies would be profitable without the burden of cross subsidy
Firstly, the Act had originally proclaimed that the then necessary evil of cross subsidy in the tariff structure would be progressively reduced and eventually removed. However, it was later amended to state that cross subsidy will only be reduced, remaining silent on when and by how much such reduction would occur. The result: cross subsidy has become the single most important reason for the mammoth distribution losses the country faces today. Distribution companies (DISCOMS) historically have been aggregators of power, getting low cost power through long term contracts and hence having every chance of being profitable, without the burden of cross subsidies.

Factors restricting competition have had a crippling effect
Secondly, lack of effective mechanisms fostering competition also has had a crippling effect on the distribution sector. Competition is restricted by high capex requirement for installing metering infrastructure, rampant power theft and ambiguity over who will bear these losses and most importantly, government influence. The fundamental objective of corporatisation post the Electricity Act, as a reform, was to arms-length the government from commercial business. Some ascribe the distribution sector’s woes to the failure in achieving this objective. As mentioned earlier, continuation of cross subsidy, an external regulatory (government) influence, has indeed been the biggest barrier to competition. Furthermore, the practicality of the clauses in the Act mandating competition is questionable. For example, if any entity has to compete in the sub-1MW category, it has to develop a parallel distribution network, which is an extremely costly and unviable proposition in itself, let alone additional challenges like land acquisition for such parallel networks.

SERCs have only themselves to blame for their failures
Finally, failure and inefficiency of State Electricity Regulatory Commissions (SERCs) has been an oft-cited reason for the plight of the distribution sector. SERCs are appointed through an elaborate process and once appointed, they are practically impossible to remove, thus enjoying a high degree of protection. According to M.K.De, if an SERC fails in bringing in efficiencies in the distribution sector despite such protection, then they have no one else to blame but themselves. The question that arises as a result therefore, is whether such unfettered protection has given the SERCs a sense of invincibility which in turn, has made them indifferent to the needs of the distribution sector.

Effective corporate governance is crucial for arresting the losses
In conclusion, it appears that state control over DISCOMS will continue in the short to medium term, where regulators will only be able to introduce surrogate competition. In the longer term, if cross subsidy is scrapped, true competition will be given a fair chance. Irrespective of whether the distribution sector remains under public or private control however, there is a strong need for effective corporate governance for uplifting the fate of the distribution sector. There have been some positive developments in this regard in the recent years. With the rising coal prices and its huge impact on input costs, SERCs had soon found the resulting losses impossible to absorb. Public sector banks collectively started funding the losses resulting in their related potential non-performing assets (NPAs) rising to INR1.5 trillion (USD30 billion), cited Mr. M.K.De. This alarming situation led the Planning Commission to intervene and stop such lending by the banks. This is ushering in reforms by forcing SERCs, so far criticised for their laxity, to take corrective actions like debt restructuring of DISCOMS and improve on the corporate governance front.