Powering distribution reforms

Dec 30 2013, 03:44 IST
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SummaryCompetition in retail supply is a must to improve service quality and ensure appropriate pricing

It is well known that the power distribution segment is the weakest link in the entire power sector value chain. Unless structural reforms take place in this segment, long-term prospects of the overall sector would be in jeopardy. High AT&C losses, unsustainable cross-subsidy levels and pile up of regulatory assets have been a bane for the sector for a long time. Distribution company (discom) restructuring alone cannot be a magic wand to solve the sector’s inherent problems. Serious structural reforms in the Indian power distribution segment are the need of the hour to obviate another round of restructuring in the next decade. The best way to undertake these reforms is to allow gradual transformation of present monolithic, monopolistic and opaque discom structure into a multi-buyer, multi-seller model for retail supply of power coupled with separation of the ‘wire’ business.

However, before allowing this, certain serious anomalies need to be corrected in a phased manner. Currently, the distribution segment suffers from high AT&C losses (as shown in the accompanying figure), which can be reduced to normative levels of 15% across the country by elimination of theft, improvement in billing and collection efficiency and improvement of T&D infrastructure at every voltage level. Secondly, unsustainable cross-subsidy, i.e. industrial/commercial consumers subsidising agricultural and retail consumers, is also a key anomaly. More importantly, cross-subsidies in India are grossly under-estimated as its calculation itself by discoms is grossly inaccurate. Ideally, cross-subsidy should be calculated voltage-wise/category-wise to reflect actual cost of servicing any consumer. However, the lack of baseline data on voltage-wise consumption gives an incomplete picture of actual cross-subsidy levied. Hence, it is pertinent to gradually phase-out cross-subsidy prior to introducing retail competition. To give fillip to this process, a surcharge like universal charge (UC), as adopted by the Philippines, could be introduced across all consumer categories and its collection could go towards formation of a state-wide/national fund to reduce the extent of cross-subsidy in retail supply. A combination of declining AT&C losses and UC mechanism may reduce overall cross-subsidy entailing cost reflective tariffs across consumer categories.

Critics would argue that removal of cross-subsidy would lead to an increase in agricultural and domestic tariffs which may not be practical due to socio-political compulsions. However, phased state government subsidy introduction for limited period to these cross-subsidised consumers and gradually increasing their tariffs, thereby reducing overall cross-subsidy, could be a far superior option than bearing of a large cross-subsidy by

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