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Public-Private Partnership Framework as a Remedy for DISCOM Debts

Introduction: Overview of the Power Sector
The electric power infrastructure value chain components include power generation, transmission, distribution, and trading.[1] Electricity is first generated at hydro, thermal or renewable energy power plants which are operated by private companies or State owned ones. Next, the generated electricity is moved through a transmission grid system which comprises transformers and power lines which move between electricity producers and end consumers. Distribution companies purchase power through power purchase agreements (PPAs¯) from generation companies and supply it to end consumers.[2]

In India, distribution forms the most important link in the value chain. Power is a concurrent subject under the Indian Constitution, with the responsibility for distribution and supply of power to rural and urban consumers resting with the States, and the Central Government providing assistance by sponsoring schemes to improve the distribution sector.[3]

However, since power distribution is a state-owned monopoly, it is weakest link in the value chain in spite of the Central Government taking several measures to rectify the issues. Furthermore, due to the various distribution hiccups, India's power consumption per capita is 1181 kWh, a figure that is among the lowest in the world, with the average being 3130kWh. There is also a vast difference in the consumption within India itself, with the highest per capita consumption being 15,179 kWh in Dadra and Nagar Haveli and the lowest being 311 kWh in Bihar.[4]

As of October 2018, the CRISIL Infralvnex ranked the Indian power sector 5.6 on a scale of 10, with 1 indicating least attractiveness¯. [5]
The power sector largely operates on conventional sources of energy such as diesel, coal, gas, and hydro power, although considerable changes are being made to shift to renewable energy sources.

Discoms & The Challenges They Pose
The distribution sector comprises state owned power distribution companies (DISCOMs¯) which are responsible for the supply and distribution of energy to consumers. These companies collect payment from consumers against energy supplies and then use the cash flow to finance generation and transmission sectors.

However, a major issue in this regard is delayed payments by consumers which leads to an almost permanent and recurring cash collection shortfall. This means that DISCOMs cannot make timely payments for their purchases from generators and the shortfall is met through borrowings and government subsidies which places the burden of interest on consumers. Another issue with this is that it severely undermines the ability of DICOMs to purchase and distribute power for fulfillment of the Universal Supply Obligation (USO¯) as per the Electricity Act, 2003.[6]

This has led to the perpetuation and creation of several other problems such as shortages and impossibly high aggregate technical and commercial losses (AT & C¯) losses as well as poor quality power supply. In fact, as of 2020, DISCOMs have accumulated overdue payments to generators to the tune of Rs. 116.340 crores which has led to a massive liquidity crunch across Indias entire power sector.[7]

In sum, at the heart of the problem is revenue deficit as the cost at which these companies procure power is usually higher than the revenue they earn from tariff charged to consumers. This is largely due to technical losses and a gap between the average cost of supplied power and the average realizable revenue (ACS ARR gap¯) The cost of power is high due to the loss of energy which occurs during transmission of power through dissipation in transformers, conductors, and other equipment used for distribution[8].

The general method of remedying the mounting losses of DISCOMs has been the granting of bail out packages by the Central Government. In fact, in June 2020, the Government announced a bailout package worth Rs. 90, 000 crore. This has been the fourth bailout package by the Centre since the year 2000.[9]

As of August 2019, the Central Government mandated letters of credit (LCs¯) for State-owned DISCOMs with power suppliers so as to guarantee timely payments and ensure financial discipline. The LC system has proved to be largely successful, however some States such as Rajasthan, Telangana, and Andhra Pradesh set conditions such as making the encashing of LCs impossible without approval from the DISCOM, thus rendering them nugatory.[10]

The financial issues plaguing the DISCOMs have been exacerbated with the ongoing COVID-19 pandemic. Hence, the Union Government also allowed a three month moratorium on DISCOMs to make payments for the electricity bought by them and also reduced the payment security amount by half for future power purchases. The penalty for late payments has also been waived in an effort to ensure the smooth supply of electricity during the lockdown.[11]

Efficacy of the Ujwal Discom Assurance Yojana Scheme
The Ujwal DISCOM Assurance Yojana (UDAY¯) scheme was launched in November 2015 in order to provide financial relief to power distribution companies. The scheme proposed that the States would take over 75% of the DISCOM debt until September 30 2015.

The various State governments would then issue UDAY bonds to banks and other financial institutions to raise money in order to repay the banks. The remaining 25% of DISCOM debt would we dealt with through converting it into lower interest rate loans by the relevant lender banks or funding raised through DISCOM bonds backed by State guarantees.

However, along with this financial relief, the UDAY scheme also proposed 2017-2019 as the target dates by which DISCOMs would have to meet efficiency parameters such as reducing power loss through transmission, faulty metering, and theft by installing geographic information systems, smart meters and mapping loss making areas.[12] DISCOMs are also expected to reduce AT & C losses to 15% by 2018-19.

However, the loss-making rate of DISCOMs has continued to outpace the relief measures under the UDAY scheme, making the scheme largely ineffective. Furthermore, AT & C losses have increased instead of decreasing. The ACS-ARR gap has also widened in several States although the UDAY scheme mandated DISCOMs to bring this gap to zero.[13]
In fact, in FY 2018, Power Finance Corporation (PFC¯), the principal lender to DISCOMs found that their combined losses were Rs. 33,365 crore. In FY 2019, the various DISCOMs shifted away from the mandates laid down in the UDAY scheme, which has contributed to the issue of the schemes targets not being met.[14]

The 2020 budget also proposed a Rs. 22,000 crore outlay for renewable energy sources and the power sector to meet its goal of round-the-clock electricity for all. The Finance Minister also implored all States to convert conventional electricity meters into pre paid smart meters within the next three years in order to provide consumers with a choice of service providers and rate of electricity. However, a revised UDAY scheme was not mentioned in the latest budget, although Power Minister R.K. Singh had hinted otherwise prior to the budget being announced.[15]

A. Is Total Privatization of DISCOMs a Viable Solution?
While the privatization of DISCOMs has been upheld as a good strategy to combat the financial backlog, there are several repercussions that need to be considered. For instance, the employment conditions of State-owned DISCOMs need to be factored in as private companies often alter the terms of employment to the employees detriment.

To take a recent example, the Uttar Pradesh government was unable to go ahead with the privatization of the Purvanchal DISCOM which distributes electricity to over 21 districts in Eastern UP. This was due to large scale resistance by the employees of the DISCOM. The protest lasted for two days in Lucknow which also led to large scale supply issues.[16] Notably, resistance of this scale was present even though the UP government had proposed public private partnership (PPP¯) and not total privatization. [17]

Similarly, in the case of BCPP Mazdoor Sangh and Ors. v. N.T.P.C. and Ors.,[18] the appellants were employees of the National Thermal Power Corporation (NTPC¯) . They were aggrieved by the procedure adopted for their transfer to Bharat Aluminum Company Limited (BALCO¯). Hence, they approached the High Court of Chhattisgarh to declare certain clauses between the agreement of both companies to be illegal, arbitrary and unenforceable against non-executive workers as the implementation of the impugned clauses would result in a unilateral change to the service conditions of all those employees who were not party to the agreement.

The Supreme Court held that It is clear that no employee could be transferred without his consent from one employer to another. Therefore...the transfer of employees from NTPC- a public sector undertaking to BALCO which is a private organization is bad in law.¯

In May 2020, the Union Government announced that DISCOMs in Union Territories would become wholly privatized in an attempt to increase their efficiency. Despite past controversies and judgments surrounding the issue of employees being transferred from PSUs to private companies, the Government decided the employees of existing DISCOMs would be transferred to the successor entities.

In Chandigarh, the Electricity Wing, Engineering Department was the first DISCOM to follow the Government mandate and issued 100% shares in the DISCOM for purchase. However, the move was met with a large scale protest by the UT Powermen Union who also filed a petition against such a privatization in the Punjab and Haryana High Court. The High Court granted them a stay order stating that the move to privatize DISCOMs would affect the employment scheme of society in general and hence would need to be considered carefully.[19]

Therefore, the move to wholly privatize DISCOMs appears to be ludicrous considering the concerns of the various stakeholders. Furthermore, the Electricity Amendment Bill, 2020 which provides for the statutory basis of privatization has not yet been passed. The new amendments advance a franchisee model wherein State-owned DISCOMs would continue to maintain electricity wires and associated infrastructure, and a private company would act as a sub-licensee for the purpose of supplying electricity to end-consumers. Some have criticized this move as they have identified that it is the Union Government itself which is responsible for the high cost of power procurement, hence privatization of this nature would not resolve the issue.[20]

The All India Power Engineers Federation (AIPEF¯) also believe that the proposed Amendment to the Electricity Act, 2003 violates the principles of federalism as State consent has to be taken before any amendment regarding policy matters is made. As noted previously, power falls in the concurrent list, hence States must have a say in the matter of privatization of DISCOMs.[21]

B. PPP as a Method to Reform DISCOMs
As aforementioned, complete privatization of DISCOMs has been largely unsuccessful in the last one year due to widespread protests by engineers and employees. Therefore, a hybrid model of public private partnership could potentially be the panacea to end power distribution woes. The various State Governments and the Union Government must necessarily retain their role of creating policies and reforms which are citizen-centric rather than consumer-centric.

On the other hand, it is also important to recognize that due to the promoters of all DISCOMs being the various State Governments, there is no competition and therefore no incentive to improve aspects such as the quality of power supplied, customer service, and cost of supply which all contribute towards low profits. The addition of private players would result in the mitigation of this monopoly power and the boosting of healthy competition in the power sector. In fact, in cities such as Mumbai, Kolkata, Ahmedabad, and Surat where private players have entered the sector, there have been considerable improvements in efficiency and customer service.

Furthermore, as early as 2002, the Delhi Government adopted the PPP model which proved to be widely successful for all the relevant stakeholders with AT & C losses decreasing, consumers receiving uninterrupted supply of electricity and accurate billing, and the installing of new connections in an efficient manner. [22] The Delhi model also ensured that employees would be granted continuation of their service terms and provided them with transition support in the initial years.

The Central Government has also proposed a new scheme known as the Atal Distribution System Improvement Yojana (ADITYA¯) with an outlay of Rs. 1.11 lakh crore which incentivizes all States to welcome the involvement of private players in order to increase the efficiency of DISCOMs.

It is believed that a hybrid model would ensure more capital infusion in the market as well as regular returns on investments which would automatically also improve the meeting of power demands of consumers and boost investor confidence.[23]

Conclusion
It has become clear that DISCOMs do not benefit from the monopoly that State Governments have enjoyed thus far. Additionally, constant bailouts by the Central Government have not proven to be an effective long term solution. Therefore, it is necessary to remedy the root cause of the various issues and enter into a hybrid arrangement with private players while ensuring that all the relevant stakeholders interests are borne in mind.

It would not do for the Central Government to flout principles of federalism as it has done in the recent past and take unilateral decisions on behalf of the States. Instead, the Amendment to the Electricity Act should be revised after an in-depth consultation with all the States and care must be taken to guarantee the retention of previous service conditions to employees being transferred from PSUs to private successor entities.

End-Notes:
  1. Sita Mishra, A Comprehensive Study and Analysis of Power Sector Value Chain in India, Management & Marketing Challenges for the Knowledge Society 8 (2013) 25-40
  2. How do the DISCOMs work? < https://www.civilsdaily.com/story/uday-scheme-for-discoms/> accessed January 16 2021
  3. Distribution, Ministry of Power, < https://powermin.nic.in/en/content/distribution-0#:~:text=Distribution%20is%20the%20most%20important,entire%20power%20sector%20value%20chain.&text=Under%20the%20Indian%20Constitution%2C%20power,consumers%20rests%20with%20the%20states.> accessed January 15 2021
  4. Telling Numberes: Indians use 181 kWh electricity per capita, wide gap among states Indian Express, New Delhi
  5. V. Sharma, Power Distribution: PPP the way forward for revival of discoms, (March 18 2019) Financial Express, < https://www.financialexpress.com/infrastructure/power-distribution-ppp-the-way-forward-for-revival-of-discoms/1519230/> accessed 15 January 2021.
  6. Ajai Nirula, Indias Power Distribution Sector: An assessment of financial and operational sustainability, Brookings India, (2019) < https://www.brookings.edu/wp-content/uploads/2019/10/India%E2%80%99s-Power-Distribution-Sector.pdf> accessed January 15 2021.
  7. Vibhuti Garg, Kashish Shah, The Curious Case of Indias Discoms: How Renewable Energy Could Reduce Their Financial Distress, IEEFA (2020) < https://ieefa.org/wp-content/uploads/2020/08/The-Curious-Case-of-Indias-Discoms_August-2020.pdf> accessed January 15 2021.
  8. V. Ananth, Why does India keep bailing out its power sector, Business Line (July 1 2020) < https://bloncampus.thehindubusinessline.com/b-learn/insight/why-does-india-keep-bailing-out-its-power-sector/article31965054.ece> accessed January 15 2021.
  9. V. Ananth (n 7).
  10. Tanya Thomas, Letter of credit system makes discoms fall in line on defaults, but problems remain, (January 12 2020), Live Mint < https://www.livemint.com/industry/energy/letter-of-credit-system-makes-discoms-fall-in-line-on-defaults-11578850784480.html> accessed January 18 2021.
  11. Utpal Bhaskar, India announces discom relief measures to ensure round-the-clock power supply Mint (March 28 2020) < https://www.livemint.com/industry/energy/india-announces-discom-relief-measures-to-ensure-round-the-clock-power-supply-11585375723511.html> accessed January 15 2021.
  12. Maulik Madhu All you wanted to know about UDAY, Business Line (March 28 2016) < https://www.thehindubusinessline.com/opinion/all-you-wanted-to-know-about-uday/article8406121.ece> accessed January 17 2021.
  13. Nikita Kwatra, UDAY schemes progress shows few hits, many misses, Live Mint (December 6 2018) < https://www.livemint.com/Home-Page/GBWI6DOjxN3e0m4np47o0I/UDAY-schemes-progress-shows-few-hits-many-misses.html> accessed January 17 2021.
  14. Anupam Chatterjee, Power shock: UDAY scheme fared even worse?, Financial Express (May 21 2020) < https://www.financialexpress.com/industry/power-shock-uday-scheme-fared-even-worse/1965396/> accessed January 17 2021.
  15. Budget 2020: Rs. 22,000 cr. outlay for power, renewable energy sector in FY21: FM Energy World (February 1 2020), < https://energy.economictimes.indiatimes.com/news/power/budget-2020-rs-22000-cr-outlay-for-power-renewable-energy-sector-in-fy21-fm/73836155> accessed January 17 2021.
  16. Shreya Jai, UP govt. rolls back decision to privatise power distribution companies Business Line (October 7 2020) < https://www.business-standard.com/article/economy-policy/up-govt-rolls-back-decision-to-privatise-power-distribution-companies-120100601627_1.html> accessed January 17 2021.
  17. K. Ashok Rao, Diving Into the Privitisation Push in Indias Power Sector, The Wire, (November 5 2020) < https://thewire.in/energy/india-power-sector-privatisation> accessed January 18 2021.
  18. AIR[2008] SCC 336.
  19. Akshay Jaitly, Discom Privitisation Challenged: Insufficient Planning or Tactical Move? Bloomberg Quint (January 8 2021) < https://www.bloombergquint.com/opinion/discom-privatisation-challenged-insufficient-planning-or-tactical-move> accessed January 18 2021
  20. Tauseef Shahidi, Why privatization push in power isnt needed (November 5 2020) Live Mint < https://www.livemint.com/industry/energy/why-privatization-push-in-power-isn-t-needed-11604549260947.html> accessed January 18 2021.
  21. 11 states, 1 UT oppose Electricity Amendment Bill says AIPEF Energy World (July 10 2020) < https://energy.economictimes.indiatimes.com/news/power/11-states-1-ut-oppose-electricity-amendment-bill-says-aipef/76884522> accessed January 18 2021
  22. Sanjay Banga, How PPP model can prove to be a panacea for power distribution woes Energy World (October 17 2019) < https://energy.economictimes.indiatimes.com/energy-speak/how-ppp-model-can-prove-to-be-a-panacea-for-distribution-woes/3834> accessed January 18 2021.
  23. Sanjay Banga, Electricity distribution: PPP model can ensure long-term sustainability Financial Express (December 27 2019) < https://www.financialexpress.com/opinion/electricity-distribution-ppp-model-can-ensure-long-term-sustainability/1805015/> accessed January 18 2021.

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