If all goes according to plan, power customers of north Delhi will soon be able to choose their electricity supplier. And when that happens, after Mumbai, north Delhi will be the second region in the country that will have more than one supplier of electricity to residents of the region. In other words, there will be competition in the retail power supply business, which to date is a monopoly structure — there is only one distributor of electricity to retail customers even though the law allows for competition in this space.This paradigm regime change is on the anvil, thanks to a bold step being initiated by the power ministry to amend the Electricity Act and separate the business of wires and retail supply or what is called “separation of carriage and content”.
Hobson's choice
Can amendments relating to power distribution in the Electricity Act rein in competition in the business?
Except for Mumbai, be it Delhi or any other state, currently the wires and supply business is under one operator/company. And if there has to be competition, the competing company will have to set up its own network in a distribution zone and gain customers.
What the new amendments to the Act propose is to do away with this structure and have only one company operating the wires business and many companies involved in supply of electricity to consumers using the wires or the distribution network of that one company. In other words, the activity of distribution is being redefined and being limited to operating (distribution) wires alone while retail supply will be handled by other players.
Simply put, there will be one distribution network being used by multiple players to supply electricity and offer choice to consumers. The amendments further allow the supplier to sublet this to other suppliers (such as franchisees).
Confirming the initiative of the Centre, Ashok Lavasa, additional secretary in the ministry of power, says, “Yes, this amendment [of separation of wires and supply] is one among the many amendments being considered by the government.” These amendments have been initiated in consultation with the state regulators and have now been sent to states for their feedback. To many, this move taken by the Centre — which is under fire for policy paralysis — to amend the Act can be a game changer in the power sector, especially in the distribution space that has remained dormant for a long time.
Praveer Sinha, chief executive officer and executive director, Tata Power Delhi Distribution, confidently declares that the company is ready for the regime change. “Our distribution company [in north Delhi] is probably the best prepared to introduce the separation of wires and content. We can do it within one year of change in law.”
Why the change?
On paper, the Electricity Act (section 14) allows for competition in power distribution. This doesn’t require any state government initiative and can be done by the power regulator by issuing a licence to firms willing to take up power distribution in a specified area.
Under the current regime, the only caveat is that the new distribution company will have to set up its own distribution network and can’t piggyback on the existing distribution firm’s network. But till end-2013, no company had come forward to set up a parallel distribution network and allow consumers to choose. The concept of competition remained only on paper.
Based on the current provisions of law, almost 10 years after the Electricity Act was enacted, Essar Projects put in an application a few months back with the Haryana power regulator to supply electricity in the Gurgaon district. This is the first application to enter power distribution by setting up a parallel network and if the regulator nod is in place before the proposed amendment to the Act, then Gurgaon will be the second city to have dual suppliers of electricity.
While executives from Essar refused to comment on the company’s proposal, the company plans to set up its own distribution network for the entire city involving capex of Rs 1,500 crore spread over five years. Essar will procure power from its own stations at a rate of Rs 5.19/unit to Rs 5.8/unit and sell to consumers in Gurgaon.
While Essar’s proposal is pending, it is understood that GMR has also recently moved an application with the Andhra power regulator to supply electricity to areas near its international airport in Hyderabad. GMR executives didn’t want to comment on their proposal.
Pending the amendments to the Act being enacted, are these green shoots of competition in distribution? As Vinayak Chatterjee, chairman of Feedback Infra, says, “This is a market waiting to happen.” The power distribution business has been so badly neglected that “anything being done where the consumer benefits is good,” says Anil Sardana, managing director, Tata Power.
Having said that, the jury is still out on whether Essar’s proposal will see the light of day, especially since the present condition of having to put up a parallel network for competition is going to be done away with. After all, many experts see the provision of parallel network as an anomaly in the law in the first place.
Setting up parallel networks has its costs. “It is capital intensive and a waste of resources” says Chatterjee. In other words, a consumer, in order to avail his choice, has to pay for two networks. Apart from issues of getting permissions for right of way to lay down cables and transformers from the local government alongside an existing distribution network, Sinha says that there are also likely to be issues on land acquisition, making the proposition of setting up a parallel network a high-risk one.
Still Life
What happened over the past decade in power distribution? For Delhi and Odisha, the process is in the hands of state governments. Under the corporatisation scheme of electricity boards, generation and transmission were spun off as distinct businesses and distribution was taken over by state-owned distribution companies (discoms). Discoms were formed for a certain geographical region, with each discom being responsible for power supply to consumers in that zone.
Unbundling was the first step to the reform process, says VS Ailawadi, former chairman, Haryana Electricity Regulatory Commission. Almost all states stopped at unbundling, which is why, according to area-wise operations, while 96% is in government control, 4% is in private hands (including Ahmedabad, Surat, Mumbai, Odisha and Delhi, all of which had private operators before the Act).
After Delhi, even the concept of privatising distribution by handing over assets has been shelved as this was viewed as moving from state monopoly to a private monopoly — the latter being a more controversial move. In simpler terms, after unbundling, distribution reforms came to a standstill and this situation persists to date, despite the law allowing for competition.
Even in Delhi, which was the last state to have privatised distribution, there is only one distributor for each of the zones. This status quo in distribution was politically suitable as the objective of distribution reforms at the state level had nothing to do with competition. Apart from technical and operational difficulties in having competition with parallel networks, one of the main benchmarks used to consider performance of discoms is their initiative to cut down aggregate technical and distribution losses. This was the reform objective. In some cities, these losses are over 60%. And the overall losses at the distribution end has already crossed Rs 2 lakh crore.
In other words, the cornerstone of distribution reforms was to improve billing and collection efficiency as well as ensure proper supply to consumers. For this objective, even in the Delhi model, privatisation was one of the options. But the Delhi model ended with Delhi.
With privatisation being a no-go for political reasons, states started adopting the next best option of distribution reforms through the franchisee model in some circles of their discoms. In this model, cities or particular zones are bid out to companies to undertake distribution of electricity on behalf of the distribution company. While the ownership rests with the distribution company, the service of supply of electricity and collection of bills is that of the franchisee. The distribution company calls for bids from franchisee companies on the basis of revenues they offer to the discom. As for the franchisee company, anything above the guaranteed revenue to the discom is profit. Agra, Nagpur, Aurangabad, Jalgaon and Bhiwandi are just some of the examples where the incumbent discom has outsourced the activity of distribution of electricity to improve efficiency in a city.
According to the Sunglu committee report, the experience of franchisees has been encouraging. In Bhiwandi, Maharashtra, since Torrent took over as the franchisee for the city in January 2007, the aggregate technical and commercial (AT&C) losses came down from 58% to 18% and collection efficiency improved from 68% to 100%.
But, then, what is true of Bhiwandi is yet to be replicated in a city like Agra, where again Torrent Power is the distribution franchisee. Sources familiar with the Agra example say that the loss figures reported during the bid turned out to be much higher after the franchisee company took over in 2010.
More recently, the incumbent government of Uttar Pradesh planned to hand over the cities of Varanasi, Meerut, Ghaziabad and Kanpur to franchisees, but the idea was dropped as there was opposition from the trade unions. And then there are examples of the other extreme situations where companies themselves are not too keen to take up franchisees while the state is willing to sublet. In Patna, Bihar, for instance, despite repeated tenders called by the Nitish Kumar government, there have been no takers for franchisees for power distribution.
As things stand, the franchisee model for distribution reforms is far from being declared as a success story as results are yet to come out. Moreover, this model has been adopted in only a few cities.
Winds of change
With financial losses of distribution companies crossing over Rs 2 lakh crore, there was no way the sector could move forward as the power sector financial bailout package of last year highlighted. Something radical had to be done to the distribution sector and the Mumbai experience offered a way out. The Maharashtra power regulator, in 2008, allowed Tata Power to supply to customers in RInfra’s circle using the latter’s distribution or wires network.
The reason? Tata Power, prior to the Electricity Act, already had a licence from the state government to distribute power and the law required the regulator to promote competition as open access was one of the main features of the Act.
While this was challenged by RInfra, the Supreme Court in 2008 upheld the regulator’s decision (despite the law requiring a parallel network to be set up by Tata Power). According to the apex court, the very concept of “wheeling” of electricity in the law allows companies (that are yet to put up their own parallel lines) to use existing networks on the payment of wheeling charges and payment of surcharge to distribute electricity.
Such an arrangement in Mumbai triggered thinking among all the regulators whether this could be replicated in other states as well. Legal opinion on the issue suggested that the Mumbai model was a one-off since Tata Power already had a pre-existing licence to distribute power in the island city. Hence, the law in its present form still required companies wanting to enter distribution to set up their own network. Moreover, it was suggested that amendments to the law were needed to have a separate wires operator and retail service provider.
With the backing of power regulators, the Centre took up the initiative and proposed amendments to the Electricity Act to separate the wires and supply businesses. The experience of Mumbai had to be replicated and the way out was to have a common carrier or an independent wires company that would allow multiple players to access its network and reach out to consumers. This was the way to introduce competition. But an amendment is just the first baby step towards having full-fledged competition across the country. Experts feel that it would not only require bold decisions to be taken by the states, it would also take many years to move to this paradigm shift across the country.
Baby steps before quantum leap
The separation of carriage and content leading to competition in the retail market is not going to be achieved overnight and according to the forum of regulators themselves, this initiative has to be carefully planned out.
Consider this: once the amendment goes through, all future supply licensees or retailers will have to depend on the network of the incumbent discom — which are mostly state owned. Not only are our distribution networks under-invested but they are nowhere near any modern network that can handle multiple suppliers tapping into such a network. And, as Sardana asks, “What’s the point in having multiple suppliers when there are brownouts because of faulty distribution networks?”
Further, one of the biggest issues of introducing competition through separation of the wires and supply businesses is that of cross-subsidy, says Kameshwar Rao, leader, power and mining, PricewaterhouseCoopers. In countries that have adopted this model (including in sectors other than power, such as the railways in the UK), the customers are charged full cost, he adds. In India, there is a major difference between cost of supply and realisation from segments such as agriculture.
That said, the rules of the distribution business don’t allow for cherry picking. Rao says that the new distribution licensee cannot choose any area of their choice or select customers. It cannot be an industrial belt or a lucrative housing society but has to be a revenue district or a municipal council/corporation of urban areas falling within a particular discom’s area.
Tata Power Delhi Distribution’s Sinha, though, is confident that competition can happen in north Delhi in a year’s time but is sceptical on whether the change will happen universally immediately. “Without 100% metering, there is no way this new model will be successful,” he says, and adds that competition will happen in pockets that move towards this endeavour.
Even if the amendment to law comes into effect, sources say that a two-stage initiative spread over years is being contemplated to bring in competition in the distribution business through segregation of the wires and supply businesses. Under the first phase that can last anywhere up to three years or more, the existing discom’s wires and retail supply business will be spun off in two different companies through proper transfer schemes and separation of employees. There will be separate licences for both the businesses defining their roles.
The wires company will continue to remain a monopoly with the past financial liabilities of the discom being transferred to the wires company. In the second phase, which can spread over six years, also the most tricky phase, states will have to be on board to eliminate losses and remove cross subsidies. “In order to have competition in retail, one has to start on a clean slate,” says Ailawadi.
Under the plans for competition in retail, the idea may well be kicked off with pilot schemes where retail competition is introduced in small pockets of a discom. The discom, on its part, while retaining the wires business, could sublet the operations and maintenance part of the wires business to ensure the network is being modernised and is kept running. Once amendments are through, even a company like Tata Power, which handles distribution in north Delhi, would have to split its wires and supply businesses. The wires business of Tata Power can be used by other companies to supply customers. Would Tata Power stand to lose, then? Not quite, says Sardana, adding that its retail business would be strong enough to retain customers.
In other words, the incumbent Tata Power would have to go the extra mile to retain consumers and the new entrant would have to do better to attract consumers. This is a big change from the existing state of affairs of Hobson’s choice. It has taken 10 years to act on the Electricity Act by which time the distribution business has slipped further into the abyss. But now change is on the anvil even though the road to reform is a long one.
They say, why fix it if ain’t broke. The converse analogy is, why fix it if it is already broken. Unfortunately, we have been following the converse analogy for too long.