India has the world’s third largest transmission and distribution network. However, the country still faces the challenge of huge energy deficit. Energy deficits have moved close to 9 % during the last decade. To meet the growing demand, the power sector needs to respond urgently to a number of challenges, particularly financial condition of distribution utilities and fuel shortage (coal).

The financial health of distribution utilities is the key area of concern in the electricity delivery chain. The aggregate financial loss of these companies has increased rapidly mainly due to absence of cost reflective commercial tariff structure. The existing tariff structure has huge revenue gaps for the discoms on account of deferred tariffs. As per the 13th Finance Commission Report, the total loss for SEBs at 2008 tariff rates is projected to be Rs. 116,000 crore in FY 2014-15 as against Rs. 68,000 crore in FY 2010-11. Therefore, tariff needs to be revised from 7% to 19% per annum. The report has also highlighted the fact that tariff revision has not taken place in some states for as long as 5 years which is bleeding the companies. Adding to the woes, is the slow progress on tariff realization and high-level cross subsidy implementation in different consumer categories by all states. This discourages competition, private sector participation and efficiency in the system.

High ATC losses or stagnant systemic losses remain a major bottleneck in the commercial viability of the distribution sector. Rampant power thefts, unmetered connections, faulty meters, poor collection efficiencies are hampering the sectors’ performance. While some states have shown signs of recovery, the losses till date stand at the national average of 28%. While there is no control on input (coal/gas) cost for power generation, the output cost (retail tariff) is controlled. About 80% of the retail tariff comprises of power purchase. There is an urgent need to examine generation cost more carefully – especially the fuel procurement practices.

Therefore, reforms in the distribution system are fundamental to improving the commercial performance and financial viability of state utilities and hence the entire power sector. To meet the challenges, utilities, regulators and planners need to revise the consumer tariff regularly and transfer the increase in fuel cost to the consumer. The state governments must also focus on consumer orientation and provide only direct subsidy, phasing out cross subsidy by other consumers.

This will foster the Open Access Framework and lead to introduction of competition in the sector which was one of the main intents of the Electricity Act 2003. Subsidies should be factored in the planned budget expenditure of the respective state governments. Direct subsidy to farmers and BPL customers needs to be pursued to strengthen the financial position of the distribution companies.

At the same time, performance of the distribution companies needs to be continuously monitored and the incentives/disincentive awarded on the basis of their performance. To improve their performance, private companies should be incentivized to participate and introduce technological upgrade and competition in the distribution sector. Also, Public Private Partnership through a sustainable Distribution Reforms Model needs to be pursued which eliminates the drawbacks of the Franchisee Model and improves upon the Privatization Model.

Unless the issues are addressed on a war footing, the power shortage will cripple the economy. The impact on cost of production and the long term growth will be severe. The 12th Plan must take a serious look at the problem and reach at a solution.(IPA Service)