Calcutta Notebook
B J

The Government has been pushing the Distribution Company (DISCOM) model for distribution of electricity. This has led to a steep increase in tariffs for the consumer. The consumer is not convinced that increases in electricity tariffs are indeed warranted by improvements in quality of supply consequent to privatization of distribution of electricity. The increases in tariff could also be due to profiteering by the DISCOMS. But track record of State Electricity Boards is even worse. They have become dens of corruption. Employees sell electricity on the sly and the State Government has to cover the losses incurred by the Boards. This burden ultimately devolves on the same hapless consumer via taxes imposed by the State Government.

The Central Government has aggressively promoted the DISCOM model in the expectation that privatization of distribution of electricity will solve this problem. The functions of purchase, getting tariff determined by the State Electricity Commissions, managing distribution of electricity and collection of dues—all have been handed over to DISCOMS. It was expected that this will improve the quality of supply to the consumer; and also relieve the State Government of bearing losses in distribution. Improvement has indeed taken place to some extent. Power cuts have almost become non-existent in metropolitan towns where DISCOMS have taken over. Outages are repaired quickly. Theft has been much reduced. Financial burden on the State Government has been reduced. This has been accompanied with an increase in tariff, however.

The consumer is caught between the devil and the deep blue sea. State Electricity Boards are unable to supply reliable power and impose huge costs on the taxpayer due to thefts etc. On the other hand, DISCOMS may be indulging in profiteering. Some DISCOMS are even running in loss despite increases in tariff. A study done by IDFC Limited says that only one of the three DISCOMS in Delhi made profits in 2007-08. In the result, no one is satisfied in the present dispensation. The consumer has to pay higher tariffs but DISCOMS plead that the increases are still inadequate. The anticipated improvement in efficiency too does not appear to have taken place—in some cases, at least. The IDFC study tells that number of outages per feeder in 2006-07 were 4 in the case of NDPL and 36 in the case of the two DISCOMS run by BSES in Delhi. The study notes that NDPL has made more capital investments leading to better supplies. Clearly NDPL has invested and made improvements while BSES has lagged behind. This shows that privatization may not lead to improvement in efficiency. A DISCOM may focus more on making profits from obtaining favourable orders from the Electricity Regulatory Commissions instead of making investments and securing better efficiency.

There is a fundamental anomaly in the present model of privatization. Purchase price of electricity is based on market movements but the sale price is determined by the Regulatory Commissions. Profits of a DISCOM depend more on a favourable decision by the Commission than on operational efficiency. Furthermore, there is not much incentive to efficiency in the procedure adopted by the Commissions for determination of tariff. The DISCOM files an Annual Revenue Requirement statement before the Commission, i.e., how much revenue is necessary for the DISCOM to maintain its services. The Commission fixes tariff on the basis of its assessment of this statement. This is done after a 'prudent check' but the efficacy of this check is anyone's guess in the present era. An inefficient DISCOM can file a higher annual revenue requirement and obtain higher increase in tariff. Profit of the DISCOM, therefore, depends more on its ability to convince the Commission of its higher revenue requirements. More fundamentally, a combination of market-based purchases with court-determined sale tariff is inconsistent and an invitation to manipulation and crony capitalism.

Other experiments may hold better potential. The Shunglu Committee headed by the former CAG of that name has suggested that a franchisee model may be promoted instead of privatization. All activities related with distribution are handed over to the DISCOM in the privatization model. These include purchase of electricity; having tariff determined by the Regulatory Commission; management of sub-stations, feeders and meters; and collection of bills. Role of the Government is limited to handing over the license. Problem with this model as explained above is that it is possible to make profits by manipulation of accounts and courts. Shunglu has suggested that only the task of distribution from the sub-station onwards and collection of bills may be handed over to a franchisee. Purchase of power and determination of tariff may continue to be done by the Electricity Boards. This will eliminate any chance of profiteering by manipulation. The franchisee will be able to earn profits strictly on the basis of improvements in distributional efficiency secured by it. Many successful experiences of the franchisee model are available.

Frontier
Vol. 45, No. 29, January 27- Feb 2, 2013

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